UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended June 30, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

Commission File Number 001-38342 

INDUSTRIAL LOGISTICS PROPERTIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

Maryland	82-2809631
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

 

Two Newton Place,	255 Washington Street,	Suite 300,	Newton,	Massachusetts	02458-1634
(Address of Principal Executive Offices)					(Zip Code)

617-219-1460

(Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol(s)	Name Of Each Exchange On Which Registered
Common Shares of Beneficial Interest	ILPT	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided in Section 13(a) of the Exchange Act.  ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒

Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of July 29, 2019: 65,087,521

INDUSTRIAL LOGISTICS PROPERTIES TRUST

FORM 10-Q

June 30, 2019

INDEX

		Page
PART I	Financial Information	3
Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets — June 30, 2019 and December 31, 2018	3
	Condensed Consolidated Statements of Comprehensive Income — Three and Six Months Ended June 30, 2019 and 2018	4
	Condensed Consolidated Statements of Shareholders' Equity — Three and Six Months Ended June 30, 2019 and 2018	5
	Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2019 and 2018	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	29
	Warning Concerning Forward-Looking Statements	30
	Statement Concerning Limited Liability	33
PART II	Other Information	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 6.	Exhibits	34
	Signatures	35

References in this Quarterly Report on Form 10-Q to the Company, we, us or our include Industrial Logistics Properties Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

2

PART I Financial Information

Item 1.  Financial Statements

INDUSTRIAL LOGISTICS PROPERTIES TRUST 

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

(unaudited)

	June 30,			December 31,
	2019			2018
ASSETS
Real estate properties:
Land	$	745,422		$	670,501
Buildings and improvements	1,546,858			791,895
	2,292,280			1,462,396
Accumulated depreciation	(109,488		)	(93,291		)
	2,182,792			1,369,105
Acquired real estate leases, net	149,819			75,803
Cash and cash equivalents	15,350			9,608
Rents receivable, including straight line rents of $56,972 and $54,916, respectively	59,793			56,940
Deferred leasing costs, net	6,091			6,157
Debt issuance costs, net	3,692			4,430
Due from related persons	826			1,390
Other assets, net	10,229			11,178
Total assets	$	2,428,592		$	1,534,611
LIABILITIES AND SHAREHOLDERS' EQUITY
Revolving credit facility	$	608,000		$	413,000
Mortgage notes payable, net	749,485			49,195
Assumed real estate lease obligations, net	18,665			18,316
Accounts payable and other liabilities	18,711			12,040
Rents collected in advance	8,326			6,004
Security deposits	6,514			6,130
Due to related persons	3,139			1,653
Total liabilities	1,412,840			506,338
Commitments and contingencies
Shareholders' equity:
Common shares of beneficial interest, $.01 par value: 100,000,000 shares authorized; 65,088,189 and 65,074,791 shares issued and outstanding, respectively	651			651
Additional paid in capital	998,836			998,447
Cumulative net income	119,559			89,657
Cumulative other comprehensive income	137			—
Cumulative common distributions	(103,431		)	(60,482		)
Total shareholders' equity	1,015,752			1,028,273
Total liabilities and shareholders' equity	$	2,428,592		$	1,534,611

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

INDUSTRIAL LOGISTICS PROPERTIES TRUST 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Rental income	$	60,090		$	39,420		$	106,077		$	80,025
Expenses:
Real estate taxes	7,495			4,582			13,060			9,167
Other operating expenses	4,198			2,824			7,584			6,369
Depreciation and amortization	16,709			6,890			26,320			13,763
General and administrative	4,856			2,888			8,656			5,462
Total expenses	33,258			17,184			55,620			34,761
Interest income	138			50			499			63
Interest expense (including net amortization of debt issuance costs and premiums of $494, $311, $897 and $622, respectively)	(13,924		)	(3,552		)	(21,520		)	(7,354		)
Income before income tax expense and equity in earnings of an investee	13,046			18,734			29,436			37,973
Income tax expense	(60		)	(8		)	(68		)	(15		)
Equity in earnings of an investee	130			—			534			—
Net income	13,116			18,726			29,902			37,958
Other comprehensive income:
Equity in unrealized gains of an investee	71			—			137			—
Other comprehensive income	71			—			137			—
Comprehensive income	$	13,187		$	18,726		$	30,039		$	37,958
Weighted average common shares outstanding - basic	65,039			65,011			65,035			63,238
Weighted average common shares outstanding - diluted	65,043			65,011			65,042			63,238
Net income per common share - basic and diluted	$	0.20		$	0.29		$	0.46		$	0.60

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

INDUSTRIAL LOGISTICS PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(dollars in thousands)

(unaudited)

										Cumulative
	Number of				Additional			Cumulative		Other		Cumulative
	Common		Common		Paid In			Net		Comprehensive		Common
	Shares		Shares		Capital			Income		Income		Distributions			Total
Balance at December 31, 2018	65,074,791		$	651	$	998,447		$	89,657	$	—	$	(60,482	)	$	1,028,273
Net income	—		—		—			16,786		—		—			16,786
Equity in unrealized gains of investee	—		—		—			—		66		—			66
Share grants	—		—		73			—		—		—			73
Distributions to common shareholders	—		—		—			—		—		(21,474		)	(21,474		)
Balance at March 31, 2019	65,074,791		651		998,520			106,443		66		(81,956		)	1,023,724
Net income	—		—		—			13,116		—		—			13,116
Equity in unrealized gains of investee	—		—		—			—		71		—			71
Share grants	15,000		—		345			—		—		—			345
Share repurchases	(1,362	)	—		(28		)	—		—		—			(28		)
Share forfeitures	(240	)	—		(1		)	—		—		—			(1		)
Distributions to common shareholders	—		—		—			—		—		(21,475		)	(21,475		)
Balance at June 30, 2019	65,088,189		$	651	$	998,836		$	119,559	$	137	$	(103,431	)	$	1,015,752

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

INDUSTRIAL LOGISTICS PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(dollars in thousands)

(unaudited)

	Number of			Additional			Cumulative		Cumulative
	Common	Common		Paid In			Net		Common
	Shares	Shares		Capital			Income		Distributions			Total
Balance at December 31, 2017	45,000,000	$	450	$	546,489		$	15,269	$	—		$	562,208
Net income	—	—		—			19,232		—			19,232
Contributions	—	—		16,162			—		—			16,162
Distributions	—	—		(9,187		)	—		—			(9,187		)
Issuance of common shares, net	20,000,000	200		444,109			—		—			444,309
Share grants	5,000	—		104			—		—			104
Balance at March 31, 2018	65,005,000	650		997,677			34,501		—			1,032,828
Net income	—	—		—			18,726		—			18,726
Share grants	15,000	—		314			—		—			314
Distributions to common shareholders	—	—		—			—		(17,551		)	(17,551		)
Balance at June 30, 2018	65,020,000	$	650	$	997,991		$	53,227	$	(17,551	)	$	1,034,317

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

INDUSTRIAL LOGISTICS PROPERTIES TRUST 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

	Six Months Ended June 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	29,902		$	37,958
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	16,197			8,967
Net amortization of debt issuance costs and premiums	897			622
Amortization of acquired real estate leases and assumed real estate lease obligations	8,854			4,210
Amortization of deferred leasing costs	460			393
Provision for losses on rents receivable	—			507
Straight line rental income	(2,981		)	(2,232		)
Other non-cash expenses	417			418
Equity in earnings of an investee	(534		)	—
Change in assets and liabilities:
Rents receivable	128			(672		)
Deferred leasing costs	(261		)	(318		)
Due from related persons	564			(2,955		)
Other assets	1,620			4,561
Accounts payable and other liabilities	5,077			(208		)
Rents collected in advance	2,322			58
Security deposits	384			128
Due to related persons	1,486			(5,635		)
Net cash provided by operating activities	64,532			45,802
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate acquisitions and deposits	(852,152		)	(43,326		)
Real estate improvements	(3,144		)	(1,461		)
Net cash used in investing activities	(855,296		)	(44,787		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares, net	—			444,309
Proceeds from issuance of mortgage notes payable	650,000			—
Borrowings under revolving credit facility	653,000			55,000
Repayments of revolving credit facility	(458,000		)	(470,000		)
Payment of debt issuance costs	(5,517		)	(4,183		)
Distributions to common shareholders	(42,949		)	(17,551		)
Repurchase of common shares	(28		)	—
Contributions	—			16,162
Distributions	—			(9,187		)
Net cash provided by financing activities	796,506			14,550
Increase in cash and cash equivalents	5,742			15,565
Cash and cash equivalents at beginning of period	9,608			—
Cash and cash equivalents at end of period	$	15,350		$	15,565
SUPPLEMENTAL DISCLOSURES:
Interest paid	$	17,663		$	6,703
Income taxes paid	$	64		$	—
NON-CASH INVESTING ACTIVITIES:
Real estate acquired by assumption of mortgage notes payable	$	(56,980	)	$	—
NON-CASH FINANCING ACTIVITIES:
Assumption of mortgage notes payable	$	56,980		$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7

INDUSTRIAL LOGISTICS PROPERTIES TRUST 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Note 1. Basis of Presentation

The accompanying condensed consolidated financial statements of Industrial Logistics Properties Trust and its consolidated subsidiaries, or we, us or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2018, or our 2018 Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior year's condensed consolidated financial statements to conform to the current year's presentation. In part because of the significant changes resulting from our initial public offering, or our IPO, on January 17, 2018, the financial results reported may not be indicative of our expected future results. For periods prior to January 17, 2018, our historical operating information and financial position have been derived from the financial statements of our former parent, Select Income REIT, or SIR, a former publicly traded real estate investment trust, or REIT, that merged with and into a wholly owned subsidiary of Office Properties Income Trust, or OPI, on December 31, 2018.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets, impairments of real estate and related intangibles.

Note 2. Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-02, Leases. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. In December 2018, the FASB issued ASU No. 2018-20, Leases (Topic 842), Narrow-Scope Improvements for Lessors. Collectively, these standards set out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. ASU No. 2016-02 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. These standards were effective as of January 1, 2019. Upon adoption, we applied the package of practical expedients that has allowed us to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases. Furthermore, we applied the optional transition method in ASU No. 2018-11, which has allowed us to initially apply the new leases standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the adoption period, although we did not have an adjustment. Additionally, our leases met the criteria in ASU No. 2018-11 to not separate non-lease components from the related lease component; therefore, the accounting for these leases remained largely unchanged from the previous standard. The adoption of ASU No. 2016-02 and the related improvements did not have a material impact in our condensed consolidated financial statements. Upon adoption, (i) amounts previously recognized as tenant reimbursements and other income, which totaled $5,540 and $11,336 for the three and six months ended June 30, 2018, respectively, have been reclassified as rental income, (ii) allowances for bad debts are now recognized as a direct reduction of rental income, and (iii) legal costs associated with the execution of our leases, which were previously capitalized and amortized over the life of their respective leases, are expensed as incurred. Subsequent to January 1, 2019, provisions for credit losses are included in rental income in our condensed consolidated financial statements. Provisions for credit losses prior to January 1, 2019 were previously included in other operating expenses in our condensed consolidated financial statements and prior periods are not reclassified to conform to the current presentation.

8

INDUSTRIAL LOGISTICS PROPERTIES TRUST 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

Revenue Recognition. We are a lessor of industrial and logistics properties. Our leases provide our tenants with the contractual right to use and economically benefit from all of the physical space specified in the leases; therefore, we have determined to evaluate our leases as lease arrangements.

Our leases provide for base rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market based indices, is recognized on a straight line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. We do not include in our measurement of our lease receivables certain variable payments, including changes in the index or market based indices after the inception of the lease, certain tenant reimbursements and other income, and percentage rents until the specific events that trigger the variable payments have occurred. Such payments totaled $9,483 and $17,764 for the three and six months ended June 30, 2019, respectively, of which tenant reimbursements totaled $9,483 and $16,602, respectively.

Certain of our leases contain non-lease components, such as property level operating expenses and capital expenditures reimbursed by our tenants as well as other required lease payments. We have determined that all of our leases qualify for the practical expedient to not separate the lease and non-lease components because (i) the lease components are operating leases and (ii) the timing and pattern of recognition of the non-lease components are the same as those of the lease components. We apply Accounting Standards Codification 842, Leases, to the combined component. Income derived by our leases is recorded in rental income in our condensed consolidated statements of comprehensive income.

Certain tenants are obligated to pay directly their obligations under their leases for insurance, real estate taxes and certain other expenses. These obligations, which have been assumed by the tenants under the terms of their respective leases, are not reflected in our condensed consolidated financial statements. To the extent any tenant responsible for any such obligations under the applicable lease defaults on such lease or if it is deemed probable that the tenant will fail to pay for such obligations, we would record a liability for such obligations.

The following table presents our operating lease maturity analysis as of June 30, 2019:

Year	Amount
2019	$	98,978
2020	198,482
2021	194,074
2022	184,277
2023	164,602
Thereafter	1,249,076
Total	$	2,089,489

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements although lease related receivables are governed by the lease standards referred to above and are not subject to ASU No. 2016-13. We currently expect to adopt the standard using the modified retrospective approach.

Note 3. Real Estate Properties

As of June 30, 2019, we owned 298 properties with a total of approximately 42,353,000 rentable square feet, including 226 buildings, leasable land parcels and easements with a total of approximately 16,756,000 rentable square feet of primarily industrial lands located on the island of Oahu, HI, or our Hawaii Properties, and 72 properties with a total of approximately 25,597,000 rentable square feet of industrial properties located in 29 other states, or our Mainland Properties.

9

INDUSTRIAL LOGISTICS PROPERTIES TRUST 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

We operate in one business segment: ownership and leasing of properties that include industrial and logistics buildings and leased industrial lands. For the three months ended June 30, 2019 and 2018, approximately 42.2% and 60.2%, respectively, of our rental income was from our Hawaii Properties. For the six months ended June 30, 2019 and 2018, approximately 47.9% and 60.4%, respectively, of our total rental income were from our Hawaii Properties. In addition, a subsidiary of Amazon.com, Inc., which is a tenant at certain of our Mainland Properties, accounted for $8,700, or 14.5%, and $3,963, or 10.1%, of our rental income for the three months ended June 30, 2019 and 2018, respectively, and $13,565, or 12.8%, and $8,230, or 10.3%, of our total rental income for the six months ended June 30, 2019 and 2018, respectively.

During the six months ended June 30, 2019, we completed the acquisition of 28 industrial properties containing a combined 12,896,164 rentable square feet for an aggregate purchase price of $909,132, including acquisition related costs of $4,482. These acquisitions were accounted for as asset acquisitions. We allocated the purchase prices for these acquisitions based on the estimated fair value of the acquired assets and assumed liabilities as follows:

													Acquired
		Number		Rentable					Buildings		Acquired		Real Estate			Discount
		of		Square	Purchase				and		Real Estate		Lease			on Assumed
Date	Location	Properties		Feet	Price		Land		Improvements		Leases		Obligations			Debt
February 2019	2 states	7		3,708,343	$	250,276	$	19,558	$	205,811	$	24,907	$	—		$	—
April 2019	Plainfield, IN	1		493,500	30,517		2,817		24,836		2,864		—			—
April 2019	12 states	20	(1)	8,694,321	628,339		52,546		519,711		56,715		(1,965		)	1,332
		28		12,896,164	$	909,132	$	74,921	$	750,358	$	84,486	$	(1,965	)	$	1,332

(1) Includes three properties leased to one tenant under three separate lease agreements that we had previously disclosed as one property prior to the conclusion of our due diligence procedures and our completion of this acquisition.

During the six months ended June 30, 2019, we committed $560 for expenditures related to tenant improvements and leasing costs for leases executed during the period for approximately 630,000 square feet. Committed but unspent tenant related obligations based on existing leases as of June 30, 2019 were $662.

Certain of our industrial lands in Hawaii may require environmental remediation, especially if the use of those lands is changed; however, we do not have any present plans to change the use of those lands or to undertake this environmental remediation. As of both June 30, 2019 and December 31, 2018, accrued environmental remediation costs of $6,940 were included in accounts payable and other liabilities in our condensed consolidated balance sheets. These accrued environmental remediation costs relate to maintenance of our properties for current uses, and, because of the indeterminable timing of the remediation, these amounts have not been discounted to present value. In general, we do not have any insurance designated to limit any losses that we may incur as a result of known or unknown environmental conditions which are not caused by an insured event, such as, for example, fire or flood, although some of our tenants may maintain such insurance that may benefit us. Although we do not believe that there are environmental conditions at any of our properties that will have a material adverse effect on us, we cannot be sure that such conditions are not present at our properties or that costs we incur to remediate contamination will not have a material adverse effect on our business or financial condition. Charges for environmental remediation costs, if any, are included in other operating expenses in our condensed consolidated statements of comprehensive income.

Pro Forma Financial Information

The following table presents our pro forma results of operations for the six months ended June 30, 2019 and 2018 as if the 28 properties we acquired in February and April 2019 and the related mortgage financings had been completed on January 1, 2018.

This pro forma financial information is not necessarily indicative of our actual financial position or results of operations for the periods presented or of our expected results of operations for any future period. Differences could result from numerous factors, including future changes in our portfolio of investments, capital structure, property level operating expenses and revenues, including rents expected to be received on our existing leases or leases we may enter during and after 2019, changes in interest rates and other reasons. Actual future results are likely to be different from amounts presented in this pro forma financial information, and such differences could be significant.

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INDUSTRIAL LOGISTICS PROPERTIES TRUST 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

	Six Months Ended June 30,
	2019		2018
Rental income	$	122,390	$	115,110
Net income	$	28,803	$	30,687
Net income per common share - basic and diluted	$	0.44	$	0.49

During the six months ended June 30, 2019, we recognized rental income of $19,237 and net income of $4,376 for the 28 acquired properties referenced above.

Note 4. Indebtedness

Our principal debt obligations at June 30, 2019 were: (1) $608,000 of outstanding borrowings under our $750,000 unsecured revolving credit facility; and (2) three mortgage notes with an aggregate outstanding principal amount of $755,730.

We have a $750,000 unsecured revolving credit facility that is available for our general business purposes, including acquisitions. The maturity date of our revolving credit facility is December 29, 2021. We may borrow, repay and reborrow funds under our revolving credit facility until maturity, and no principal repayment is due until maturity. Interest on borrowings under our revolving credit facility is calculated at floating rates based on LIBOR plus a premium that varies based on our leverage ratio. We have the option to extend the maturity date of our revolving credit facility for two, six month periods, subject to payment of extension fees and satisfaction of other conditions. We are also required to pay a commitment fee on the unused portion of our revolving credit facility until and if such time as we make a ratings election, and thereafter we will be required to pay a facility fee in lieu of such commitment fee based on the maximum amount of our revolving credit facility. The agreement governing our revolving credit facility, or our credit agreement, also includes a feature under which the maximum borrowing availability under our revolving credit facility may be increased to up to $1,500,000 in certain circumstances. As of June 30, 2019, interest payable on the amount outstanding under our revolving credit facility was LIBOR plus 130 basis points and our commitment fee was 15 basis points. As of June 30, 2019 and December 31, 2018, the interest rate payable on borrowings under our revolving credit facility was 3.71% and 3.81%, respectively. The weighted average interest rate for borrowings under our revolving credit facility was 3.76% and 3.26% for the three months ended June 30, 2019 and 2018, respectively, and 3.77% and 3.10% for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019 and July 29, 2019, we had $608,000 and $603,000, respectively, outstanding under our revolving credit facility, and $142,000 and $147,000, respectively, available to borrow under our revolving credit facility.

Our credit agreement provides for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as a change of control of us, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business manager and property manager. Our credit agreement also contains covenants, including those that restrict our ability to incur debts or to make distributions in certain circumstances, and generally requires us to maintain certain financial ratios. We believe we were in compliance with the terms and conditions of the covenants under our credit agreement at June 30, 2019.

In January 2019, we obtained a $650,000 mortgage loan secured by 186 of our properties containing approximately 9.6 million square feet located on the island of Oahu, Hawaii. This non-amortizing loan matures on February 7, 2029 and requires monthly payments of interest only at a fixed rate of 4.31% per annum.

In connection with the acquisition of a portfolio of 20 industrial properties, as discussed in Note 3, we assumed $56,980 of mortgage debt secured by one property containing approximately 1.0 million square feet located in Ruskin, FL. This non-amortizing loan matures on October 1, 2023 and requires monthly payments of interest only at a fixed rate of 3.60% per annum.

As of June 30, 2019, the aggregate principal amount outstanding under our three mortgage notes was $755,730. These mortgage notes were secured by 188 properties with an aggregate net book value of $663,642 as of June 30, 2019.

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INDUSTRIAL LOGISTICS PROPERTIES TRUST 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

Note 5. Fair Value of Assets and Liabilities

Our financial instruments include cash and cash equivalents, rents receivable, our revolving credit facility, mortgage notes payable, accounts payable, rents collected in advance, security deposits and amounts due from or to related persons. At June 30, 2019 and December 31, 2018, the fair value of our financial instruments approximated their carrying values in our condensed consolidated financial statements, due to their short term nature or floating interest rates, except as follows:

	At June 30, 2019				At December 31, 2018
	Carrying		Estimated		Carrying		Estimated
	Value (1)		Fair Value		Value (1)		Fair Value
Mortgage notes payable	$	749,485	$	811,395	$	49,195	$	48,642

(1) Includes unamortized premiums and debt issuance costs of ($6,245) and $445 as of June 30, 2019 and December 31, 2018, respectively.

We estimate the fair value of our mortgage notes payable using discounted cash flow analyses and currently prevailing market rates as of the measurement date (Level 3 inputs). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

Note 6. Shareholders’ Equity

Share Issuances:

On June 3, 2019, in accordance with our Trustee compensation arrangements, we granted 3,000 of our common shares, valued at $18.73 per share, the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on that day, to each of our five trustees as part of their annual compensation.

Distributions:

On February 21, 2019, we paid a quarterly distribution of $0.33 per common share, or $21,474, to shareholders of record on January 28, 2019.

On May 16, 2019, we paid a quarterly distribution of $0.33 per common share, or $21,475, to shareholders of record on April 29, 2019.

On July 18, 2019, we declared a regular quarterly distribution of $0.33 per common share, or approximately $21,500, to shareholders of record on July 29, 2019. We expect to pay this distribution on or about August 15, 2019.

Common Share Purchases:

On April 5, 2019, we purchased an aggregate of 1,362 of our common shares, valued at $20.49 per common share, the closing price of our common shares on Nasdaq on that day, from one of our former officers in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.

On July 3, 2019, we purchased an aggregate of 668 of our common shares, valued at $21.48 per common share, the closing price of our common shares on Nasdaq on that day, from a former employee of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.

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INDUSTRIAL LOGISTICS PROPERTIES TRUST 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

Note 7. Weighted Average Common Shares

The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands):

	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018
Weighted average common shares for basic earnings per share	65,039	65,011	65,035	63,238
Effect of dilutive securities: unvested share awards	4	—	7	—
Weighted average common shares for diluted earnings per share	65,043	65,011	65,042	63,238

Note 8. Certain Historical Arrangements and Operations Prior to our IPO

In connection with our IPO, on September 29, 2017, SIR contributed to us 266 properties with a total of approximately 28,540,000 rentable square feet, or our Initial Properties, including 16,834,000 rentable square feet of primarily industrial lands in Hawaii and approximately 11,706,000 rentable square feet of industrial and logistics properties in 24 other states. In connection with our IPO, we reimbursed SIR for approximately $7,271 of costs that SIR incurred in connection with our formation and preparation for our IPO.

We do not have any employees. As a wholly owned subsidiary of SIR, until the completion of our IPO, we had received services from RMR LLC under SIR’s business and property management agreements with RMR LLC. For periods prior to the completion of our IPO on January 17, 2018, base management fees payable by SIR under SIR’s business management agreement with RMR LLC and allocated to us were calculated based on the historical costs of our Initial Properties, and incentive management fees, and internal audit costs payable by SIR and allocated to us were based on the percentage of our base management fees compared to the total base management fees paid by SIR. During the period from January 1, 2018 to January 16, 2018, the base management fees payable by SIR and allocated to us were $308. This amount is included in general and administrative expenses in our condensed consolidated statements of comprehensive income. The property management and construction supervision fees payable by SIR under SIR’s property management agreement with RMR LLC that were allocated to us for the period from January 1, 2018 to January 16, 2018 were $230. This amount is included in other operating expenses or has been capitalized, as appropriate, in our condensed consolidated financial statements. For the period from January 1, 2018 to January 16, 2018, the total amount allocated to us for reimbursements that SIR paid to RMR LLC for employment and related expenses of RMR LLC employees assigned to work exclusively or partly at properties then owned by SIR, including the Initial Properties, SIR's share of the wages, benefits and other related costs of RMR LLC's centralized accounting personnel, SIR’s share of RMR LLC’s costs for providing SIR’s internal audit function and for other agreed upon amounts with respect to SIR’s business and property management agreements with RMR LLC was $120. This amount was included in other operating expenses in our condensed consolidated statements of comprehensive income. All these management fees and reimbursements allocated to us for periods prior to January 17, 2018 were paid by SIR and not us.

In connection with our IPO, we entered two agreements with RMR LLC to provide management services to us. See Notes 9 and 10 for further information regarding our relationships, agreements and transactions with RMR LLC and SIR.

Note 9. Business and Property Management Agreements with RMR LLC

We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to our property level operations.

Pursuant to our business management agreement with RMR LLC, we recognized business management fees of $3,092 and $5,285 for the three and six months ended June 30, 2019, respectively, and $1,824 and $3,306 for the three months ended June 30, 2018 and for the period from January 17, 2018 through June 30, 2018, respectively. Based on our common share total return, as defined in our business management agreement, as of June 30, 2019, no estimated 2019 incentive fees are included in the net business management fees we recognized for the three or six months ended June 30, 2019. The actual amount of annual incentive fees for 2019, if any, will be based on our common share total return, as defined in our business management

13

INDUSTRIAL LOGISTICS PROPERTIES TRUST 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

agreement, for the period from January 12, 2018 to December 31, 2019 and will be payable in 2020. No estimated 2018 incentive fees are included in the net business management fees we recognized for the three months ended June 30, 2018 or for the period from January 17, 2018 through June 30, 2018. The amounts for business management fees are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.

Pursuant to our property management agreement with RMR LLC, we recognized aggregate property management and construction supervision fees of $1,922 and $3,269 for the three and six months ended June 30, 2019, respectively, and $1,155 and $2,122 for the three months ended June 30, 2018 and for the period from January 17, 2018 through June 30, 2018, respectively. These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

We are generally responsible for all our operating expenses, including certain expenses incurred or arranged by RMR LLC on our behalf. We are generally not responsible for payment of RMR LLC’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR LLC's employees assigned to work exclusively or partly at our properties, our share of the wages, benefits and other related costs of RMR LLC's centralized accounting personnel, our share of RMR LLC’s costs for providing our internal audit function, or as otherwise agreed. Our property level operating expenses are generally incorporated into the rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC. We reimbursed RMR LLC $1,026 and $1,929 for these expenses and costs for the three and six months ended June 30, 2019, respectively, and $713 and $1,307 for the three months ended June 30, 2018 and for the period from January 17, 2018 through June 30, 2018, respectively. These amounts are included in other operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income.

See Notes 8 and 10 for further information regarding our relationships, agreements and transactions with RMR LLC.

Note 10. Related Person Transactions

We have relationships and historical and continuing transactions with RMR LLC, OPI (as successor by merger to SIR) and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and which have trustees, directors and officers who are also our Trustees or officers.

Our Manager, RMR LLC. We have two agreements with RMR LLC to provide management services to us. See Note 9 for further information regarding our management agreements with RMR LLC.

RMR LLC is a majority owned subsidiary of The RMR Group Inc., or RMR Inc., and RMR Inc. is the managing member of RMR LLC. Adam D. Portnoy, the Chair of our Board of Trustees and one of our Managing Trustees, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., a managing director, president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. John G. Murray, our other Managing Trustee and our President and Chief Executive Officer, also serves as an officer and employee of RMR LLC, and each of our other officers is an officer and employee of RMR LLC.

SIR and OPI. Effective December 31, 2018, SIR merged with and into a wholly owned subsidiary of OPI. Adam Portnoy, one of our Managing Trustees, is also a managing trustee of OPI and was a managing trustee of SIR prior to its merger with OPI’s subsidiary. RMR LLC provided management services to SIR until its merger with OPI’s subsidiary and continues to provide management services to OPI and to us. As a condition to the closing of the merger, on December 27, 2018, SIR distributed all 45,000,000 of our common shares that it owned to SIR’s shareholders of record on December 20, 2018. As a result of the merger, OPI succeeded to all of SIR’s rights and obligations, including with respect to SIR’s agreements with us.

SIR owed to us $826 and $865 as of June 30, 2019 and December 31, 2018, respectively, for rents that it collected from certain of our tenants and which were due to us. OPI (as successor by merger to SIR) paid these amounts due to us in July 2019 and January 2019, respectively.

AIC. We, ABP Trust and five other companies to which RMR LLC provides management services currently own Affiliates Insurance Company, or AIC, an Indiana insurance company, in equal amounts. We purchased our AIC interest from SIR on December 31, 2018 for $8,632. We (including SIR prior to our IPO) and the other AIC shareholders historically

14

INDUSTRIAL LOGISTICS PROPERTIES TRUST 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

participated in a combined property insurance program arranged and reinsured in part by AIC. The policies under that program expired on June 30, 2019, and we and the other AIC shareholders elected not to renew the AIC property insurance program; we have instead purchased standalone property insurance coverage with unrelated third party insurance providers.

As of June 30, 2019 and December 31, 2018, our investment in AIC had a carrying value of $9,303 and $8,632, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. We recognized income of $130 and $534 for the three and six months ended June 30, 2019, respectively, related to our investment in AIC, which amount is presented as equity in earnings of an investee in our condensed consolidated statement of comprehensive income. Our other comprehensive income includes our proportionate share of unrealized gains (losses) on fixed income securities, which are owned by AIC, related to our investment in AIC.

For further information about these and other such relationships and certain other related person transactions, see our 2018 Annual Report.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and with our 2018 Annual Report.

OVERVIEW

We are a REIT organized under Maryland law. As of June 30, 2019, we owned 298 properties with approximately 42.4 million rentable square feet, including 226 buildings, leasable land parcels and easements with approximately 16.8 million rentable square feet located on the island of Oahu, HI, and 72 properties with approximately 25.6 million rentable square feet located in 29 other states. As of June 30, 2019, our properties were approximately 99.3% leased (based on rentable square feet) to 265 different tenants with a weighted average remaining lease term (based on annualized rental revenues) of approximately 9.8 years. We define the term annualized rental revenues as used in this section as the annualized contractual rents, as of June 30, 2019, including straight line rent adjustments and excluding lease value amortization, adjusted for tenant concessions including free rent and amounts reimbursed to tenants, plus estimated recurring expense reimbursements from tenants.

Property Operations

As of June 30, 2019, 99.3% of our rentable square feet was leased, compared to 99.1% of our rentable square feet as of June 30, 2018. Occupancy data for our properties as of June 30, 2019 and 2018 is as follows (square feet in thousands):

	All Properties				Comparable Properties (1)
	As of June 30,				As of June 30,
	2019		2018		2019		2018
Total properties	298		267		266		266
Total rentable square feet (2)	42,353		28,780		28,472		28,540
Percent leased (3)	99.3	%	99.1	%	99.0	%	99.1	%

(1) Consists of properties that we owned (including for the period SIR owned our properties prior to our IPO) continuously since January 1, 2018.

(2) Subject to modest adjustments when space is remeasured or reconfigured for new tenants and when land leases are converted to building leases.

(3) Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases as of June 30, 2019, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any.

15

The average effective rental rates per square foot, as defined below, for our properties for the three months ended June 30, 2019 and 2018 are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Average effective rental rates per square foot leased: (1)
All properties	$	5.82	$	5.58	$	5.86	$	5.65
Comparable properties (2)	$	5.87	$	5.59	$	5.87	$	5.67

(1) Average effective rental rates per square foot leased represents annualized rental income during the period specified divided by the average rentable square feet leased during the period specified.

(2) Comparable properties for the three months ended June 30, 2019 and 2018 consist of 266 buildings, leasable land parcels and easements that we owned continuously since April 1, 2018. Comparable properties for the six months ended June 30, 2019 and 2018 consist of 266 buildings, leasable land parcels and easements that we owned (including for the period that SIR owned our properties prior to our IPO) continuously since January 1, 2018.

During the three months ended June 30, 2019, we entered new leases and lease renewals for approximately 359,000 square feet at weighted average (by square feet) rental rates that were approximately 27.5% higher than prior rates for the same land area or building area (with leasing rate increases for vacant space based upon the most recent rental rate for the same space). Commitments for tenant improvements, leasing costs and concessions for leases entered during the three months ended June 30, 2019 totaled $472,000, or approximately $0.12 per square foot per year of the new weighted average lease term.

As shown in the table below, approximately 0.1% of our total rented square feet and approximately 0.1% of our total annualized rental revenues as of June 30, 2019 are included in leases scheduled to expire by December 31, 2019.

As of June 30, 2019, our lease expirations by year are as follows (dollars and square feet in thousands):

											% of Total		Cumulative
					% of Total		Cumulative %		Annualized		Annualized		% of Total
		Rented			Rented		of Total Rented		Rental		Rental		Annualized
	Number of	Square Feet			Square Feet		Square Feet		Revenues		Revenues		Rental Revenues
Period / Year	Tenants	Expiring (1)			Expiring (1)		Expiring (1)		Expiring		Expiring		Expiring
7/1/2019-12/31/2019	3	40			0.1	%	0.1	%	$	306	0.1	%	0.1	%
2020	16	709			1.7	%	1.8	%	2,923		1.2	%	1.3	%
2021	31	3,045			7.2	%	9.0	%	17,086		7.1	%	8.4	%
2022	68	3,080			7.3	%	16.3	%	23,174		9.7	%	18.1	%
2023	25	2,449			5.8	%	22.1	%	15,377		6.4	%	24.5	%
2024	27	10,186			24.2	%	46.3	%	42,201		17.6	%	42.1	%
2025	13	1,421			3.4	%	49.7	%	8,283		3.5	%	45.6	%
2026	2	611			1.5	%	51.2	%	3,128		1.3	%	46.9	%
2027	9	5,538	(2	)	13.2	%	64.4	%	26,982		11.3	%	58.2	%
2028	21	2,921			6.9	%	71.3	%	19,778		8.3	%	66.5	%
Thereafter	85	12,066			28.7	%	100.0	%	80,063		33.5	%	100.0	%
Total	300	42,066			100.0	%			$	239,301	100.0	%
Weighted average remaining lease term (in years):		8.9							9.8

(1) Rented square feet is pursuant to existing leases as of June 30, 2019, and includes (i) space being fitted out for occupancy, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any.

(2) Rented square feet excludes a 194 square foot expansion under construction until the commencement of the lease for that space.

16

The following chart shows the annualized rental revenues as of June 30, 2019 scheduled to reset at our Hawaii Properties:

Scheduled Rent Resets at Hawaii Properties

(dollars in thousands)

 

	Annualized
	Rental Revenues as of
	June 30, 2019
	Scheduled to Reset
7/1/2019 - 12/31/2019	$	1,861
2020	2,527
2021	2,471
2022	4,050
2023	2,842
2024 and thereafter	15,866
Total	$	29,617

We generally receive rents from our tenants monthly in advance. As of June 30, 2019, tenants representing 1% or more of our total annualized rental revenues were as follows (square feet in thousands):

								% of Total
			No. of	Rented	% of Total			Annualized Rental
Tenant		States	Properties	Sq. Ft. (1)	Rented Sq. Ft. (1)			Revenues
1	Amazon.com Services, Inc.	FL, IN, SC, TN, VA	6	6,119	14.5	%		14.6	%
2	Federal Express Corporation / FedEx Ground Package System, Inc.	AR, CO, HI, IA, ID, IL, MN, MO, NC, ND, NV, OH, OK, UT	17	952	2.3	%		4.0	%
3	The Procter & Gamble Distributing LLC	OH	1	1,791	4.3	%		3.8	%
4	Restoration Hardware, Inc.	MD	1	1,195	2.8	%		2.5	%
5	American Tire Distributors, Inc.	CO, LA, NE, NY, OH	6	722	1.7	%		2.1	%
6	UPS Supply Chain Solutions Inc.	NH	1	614	1.5	%		2.1	%
7	Par Hawaii Refining, LLC	HI	2	3,148	7.5	%		2.0	%
8	Servco Pacific Inc.	HI	4	537	1.3	%		1.8	%
9	SKF USA Inc.	MO	1	431	1.0	%		1.7	%
10	EF Transit, Inc.	IN	1	535	1.3	%		1.7	%
11	Subaru of America, Inc.	IN	1	963	2.3	%		1.5	%
12	Shurtech Brands, LLC	OH	1	645	1.5	%		1.5	%
13	BJ's Wholesale Club, Inc.	NJ	1	634	1.5	%		1.4	%
14	Safeway Inc.	HI	2	146	0.3	%		1.4	%
15	Exel Inc.	SC	1	945	2.2	%		1.3	%
16	Trex Company, Inc.	NV, VA	2	646	1.5	%		1.2	%
17	Avnet, Inc.	OH	1	581	1.4	%		1.2	%
18	A.L. Kilgo Company, Inc.	HI	5	310	0.7	%		1.2	%
19	Cummins Inc.	KY	1	604	1.4	%		1.2	%
20	Manheim Remarketing, Inc.	HI	1	338	0.8	%	<